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The Gold Report: Richard, at the Gold
Symposium in Sydney, Australia, last November, one of your charts
tracked the erosion of U.S. dollar purchasing power. Can you give
us a summary?

Richard Karn: It's interesting that if you go
back to the late 18th century, the dollar has been on the gold
standard roughly the same amount of time it has been on the
Federal Reserve System, which presents us with a wonderful
opportunity to compare the dollar's purchasing power over
time.

Throughout the 19th century with all of the booms and busts, the
wars, and the incredible territorial and industrial expansions,
the dollar maintained its purchasing power very well on the gold
standard. Since 1914, when the U.S. went to the Federal Reserve
System and especially since it has become a purely fiat currency
system since closing the gold window in 1971, the dollar's
purchasing power has collapsed. Under the Fed's administration,
the dollar has lost well over 95% of its purchasing power.

We show this chart in our presentations, pointing out that the
purchasing power of the dollar on the left scale is in log format
while the GDP, M2/M3 and Public Debt figures are in linear format
on the right scale. Our intention here is simply to highlight the
explosion of nominal GDP, M2/M3 and
Public Debt corresponds with the collapse of the
real purchasing power of the dollar
that attended the end of any pretense to adhering to a gold
standard in 1971.

However, in order to dispel any accusations of bias, here is the
same data in log format on both scales: the take-away is still
that the explosion of nominal GDP,
M2/M3 and Public Debt corresponds with the collapse of the
real purchasing power of the dollar
that attended the end of any pretense to adhering to a gold
standard. If anything, to mathematicians the chart is even more
damning.

While public awareness of this problem has grown steadily for 40
years, grassroots objection is just now reaching a critical mass,
especially among the younger followers of presidential candidate
Ron Paul. That is why Federal Reserve Chairman Ben Bernanke, in
reaching out to the next generation of leaders with his series of
university lectures, is disingenuously making a point of damning
the gold standard for its "volatility" while utterly dismissing
the simple truth that at least on the gold standard the dollar
retained its purchasing power over time, something the U.S.
dollar under the Federal Reserve Bank's stewardship unequivocally
has failed to do.

In 1914, the U.S. moved away from the gold standard and into a
financial system based on debt and ever-increasing monetary
inflation; the transition was completed in August 1971 when Nixon
ended dollar convertibility into gold, and John Connelly famously
told concerned European bankers, "it's our currency, but it's
your problem."

What has emerged is a system under which people earn more nominal
dollars of less real value, which disguises the loss of real
purchasing power. For four decades, real wages have not kept up
with the rate of inflation. Savings have been drawn down and the
standard of living in the U.S. has declined. As a consequence,
debt levels have soared.

The Fed is targeting inflation rates of 2% to 3% per year, which
roughly equates to the inflation rate Americans experienced under
the gold standard over the entirety of the ninteenth
century. We have long suspected that this figure
was chosen because the Fed believes that is the threshold people
will tolerate being stolen from their paychecks without
complaint. But 2% to 3% inflation compounded annually over the
course of a 35- or 40-year working career amounts to a massive
loss of purchasing power as well as fostering a false sense of
security regarding one's financial situation.

This is a very sophisticated swindle, and all of the powers of
government are being brought to bear in order to hide what they
have done or to deflect blame, but they are increasingly being
cornered by demographics. For most of their working careers,
people are too busy earning a living and raising a family to take
the time to monitor what monetary policy was doing to their life
savings and the retirement they envisioned that they can no
longer afford.

TGR: And now the largest wave of retirees in
American history is about to have a nasty suprise?

RK: Exactly. Retiring Baby Boomers are
discovering they have been duped and that their golden years have
been confiscated by a government they believed was serving their
interestsand this largest cohort of the population, as well as
an increasing number of young people facing a very bleak future
determined for them before they were born by deficit spending
politicians and their social welfare programs that have simply
run amokare saying "We're mad as hell, and we're not going to
take it anymore."

I believe that when you see the radical left in America as
manifested by the Occupy Wall Street movement marching right by
the radical right in America as manifested by the Tea Party
movement effectively mouthing the same slogans, and seeing their
ranks swell with retiring Baby Boomers, change is at hand.

The United States has a history of reform, of "throwing the bums
out," and we think it likely that time is at hand once
again.

To be clear: we think this is a good thing, a cleansing thing,
that will lead to better lives for the mass of Americans.

TGR: You dubbed the destructive course of fiat
currencies and sovereign debt levels the "global pandemic of
corruption" and suggested that if people want to grow wealth in a
negative real-interest-rate environment they must speculate. But
where?

RK: In a negative real-interest-rate
environment, if you do nothing, you lose money because the
purchasing power of your money is in perpetual decline. But where
should you invest? At The Emerging Trends Report, we are
students of history, and what is transpiring today is not newin
fact, it has happened hundreds of times before, just not on a
global scale. History tells us there has never been a successful
fiat currencyevery single one has failed for exactly the reasons
we are experiencing firsthand today. Over time, a fiat currency's
purchasing power is utterly destroyed by politicians. So
obviously, we like gold and silver, which we will come back to in
a moment.

Under a fiat currency regime, the rubber always meets the road at
real assets, particularly resources, which simply cannot be
conjured with the stroke of a few computer keys.

First, we like oil and gas. If there are two aspects of the U.S.
economy that still represent American innovation and
entrepreneurial spirit, it is technology and the oil and gas
industry, the latter of which is frequently overlooked as a
technology play. America does oil and gas better than
anybody else. Having natural gas at $2.50 per
million BTUs may be the most important competitive advantage
America has been legitimately afforded since World War II. It
would be foolish not to take advantage of it, and we think the
market will overcome the array of bureaucracies aligned against
it.

Second, we like large, job-generating, economy-enhancing
infrastructure projects, in particular oil and gas pipelines, the
rebuilding of the North American electrical grid, and water and
wastewater treatment plantsas well as the engineering and
construction firms that will make it happen.

American politicians of all political stripes have neglected the
maintenance, replacement and expansion of U.S. infrastructure for
the better part of 30 years, preferring to kick the
infrastructure can down the road while promoting pet vote-buying
projects, but we have reached a point where that is no longer
possiblewe've run out of road. We have gas lines exploding,
massive sink holes or subsidence from water main leakage, and a
rapidly increasing incidence of brown- and black-outs.

This infrastructure program will drive the third and most
speculative theme: specialty metals, all of which are leveraged
either to technological advance, or the base metals upon which a
domestic infrastructure rebuild program will rely.

When the U.S. goes into the market for the materials to undertake
this rebuild cycle, prices will take off because there is far
less of these specialty metals available today than people
realize, and they are harder and more expensive to extract,
process and bring to market. The upside on these metals is truly
stunning.

And of course, we like gold and silverthe ultimate anti-fiat
currency.

TGR: You've spent a lot of time in Australia
looking at precious and specialty metal projects. Tell us: the
success of the Australian mining industry has helped raise the
Australian dollar against the U.S. dollar. What effect is that
having on the mining sector?

RK: First and foremost, it is undercutting the
mining industry's profitability. Because gold and silver are
priced in U.S. dollars and the Australian dollar, in which they
incur operating expenses, is going up against the U.S. dollar,
despite various

hedging strategies, profitability has not matched the increase in
the price of gold or silver.

People in North America do not realize how difficult it is for
small Australian companies to get financing. As a result,
companies fund themselves by issuing shares. North American
investors see an Australian company with half a billion shares
out there, selling at $0.09, and they assume this is bad
management, when in reality equity dilution is often a matter of
not having another course available to them.

In response to the prolonged dearth of financing, which actually
predates the global financial crisis, we are starting to see more
medium and large companies buying smaller companies with good
deposits with equity, or company scripthe corporate equivalent
of fiat currency. I believe we will see an acceleration in this
trend over the next 18 months with premiums ranging from 30% to
70%.

The problem for the acquiring medium and large companies will be
how much equity dilution their shareholders will tolerate before
there is a backlash.

TGR: Do you particularly like gold companies in
this regard?

RK: Absolutely. This trend is especially
prevalent in the Australian gold sector.

TGR: Have there been any recent discoveries in
Australia that have investors and the mining sector
excited?

In fact, we'll be spending the majority of the next 18 months in
Western Australia to do exactly that.

TGR: Your newsletter has a bias for historic
gold producers. Can you give us some names?

RK: I'll give you two with interesting stories.
The first is Morning Star Gold NL
(MCO:ASX), a narrow vein gold mine at Woods Point in
Victoria. Western Mining ran it for 25 years, and took out 25,000
to 28,000 tons of ore each year, grading 27 grams of gold per ton
(g/t). Then it stopped production, not because the grade was
declining or they were running out of ore but because the fixed
price of gold was undermining profitability, and management
decided to go chase nickel during the Poseidon Boom in the
1960sthey simply closed all six of their eastern gold
mines.

After overcoming a host of obstacles, management has been very
good at communicating with shareholders on its website. Morning
Star has finally concluded the majority of its capital spend and
has brought the mine back into productionalbeit more slowly than
anticipated. It has a 900,000-ounce (oz) resource with
considerable exploration upside.

It's been a "hard slog" for the Morningstar crew, but things are
finally coming together. It is building toward production on
multiple fronts and drilling on a couple of new reefs. One
interesting anomaly Morningstar is experiencing as it resumes
production is that it is finding that the final ore grade
reconciliations differ from the on-site estimations,
often coming in 24 times higher, which
is consistent with historic production and should be reassuring
for shareholders.

While the Morning Star mine itself will be profitable, I think
the upside for shareholders will be found in the myriad historic
sites spread over its 200 square kilometers of tenements in the
Woods Points region. Historically, mining operations throughout
the Jamieson-Walhalla Synclinorium lacked the capital to operate
below the weathered zone of the countless dykes in the region. Of
the hundreds of mines that were sunk in the region, only three
raised sufficient capital to go below the water table with
mechanization. So Morningstar has all of these targets where gold
was found and extracted, but only very superficially, which we
think presents a remarkable opportunity.

TGR: What are the cash cost projections?

RK: I think the company is using $750/oz all-in
cash costs.

TGR: Do you think that is on the high
side?

RK: No. There is a lot of fancy footwork being
employed in annual reports in the gold sector. When I say all-in
costs, I mean everything, including administration and
exploration. I wouldn't be surprised if the
all-in cost of gold production
industry-wide right now is really in the vicinity of
$1,000/oz.

TGR: And the second name?

RK:Cortona Resources Ltd. (CRC:ASX), which is
developing Dargues Reef, located about 60 kilometers (km) east of
Canberra, the Australian capital. The large tenement package
Cortona controls encompasses the majority of the sites of the
biggest gold rush in New South Wales history, during which miners
recovered 1.2 million ounces (Moz) of alluvial gold.

Dargues Reef may be the source, or one of the sources, of all
that alluvial gold, the literal motherlode, but because of the
remoteness at the time and the processing technology of the day,
old-timers were unable to mine Dargues Reef economically.

Cortona has come up with a very good, and very unusual resource,
in that it has an unusual uniformity grade of 7.4 g/t. To date,
Cortona has also found two other geological formations exactly
like Dargues Reef, which may create tremendous upside.

This is the first new gold mine to be permited in New South Wales
in more than seven years and represents no mean feat. Cortona's
management has been actively engaged with the community and
environmental groups for a number of years, and I think they
really should be applauded for their efforts. If Cortona finds
the source of that 1.2 Moz of alluvial gold, it will be opening
up a new gold field in New South Wales of all places, one of the
more populated areas in Australia.

TGR: Do you expect issues with permitting a
bigger operation?

RK: One of the "nice" things, from an
environmental point of view, about an underground narrow vein
operation is that it has a very small environmental footprint. In
the case of Dargues Reef, about half of the gold will be
recovered by simple, unthreatening gravity separation, and the
remaining concentrate will be trucked to a carbon in leach (CIL)
plant 400km away.

TGR: Do you have any parting thoughts on
precious metals in Australia?

RK: Australia is a safe country. It has very
good miners and very good geology. We see an absolute wall of
money headed Australia's way at some point because the worse the
sovereign debt and sovereign risk issues get, the more people
will pay a premium for safe countries in which to operate. That
pretty much sums it up.

TGR: Richard, thank you for your time.

RK: It's been a pleasure.

Richard Karn, managing editor
ofThe Emerging Trends Report, has a
broad, multi-disciplinary background, industry contacts, and a
working knowledge of these metals as well as considerable
research, analytical and writing experience pertaining to them.
His firm has published nine Emerging Trends Reports,
which were updated in the aftermath of the global financial
crisis and published in the form of an eBook, Credit &
Credibility. For more than two years The Emerging Trends
Report has been conducting a boots-on-the-ground survey of
Australian precious and specialty metal projects. If you would be
interested in participating in the exciting venture, please
contact Karn at rkarn@emergingtrendsreport.com.

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DISCLOSURE:
1) Brian Sylvester of The Gold Report conducted this
interview. He personally and/or his family own shares of the
following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are
sponsors of The Gold Report: Morning Star Gold NL.
Streetwise Reports does not accept stock in exchange for
services.
3) Richard Karn: I personally and/or my family own shares of the
following companies mentioned in this interview: Morning Star
Gold NL, Cortona Resources Ltd. I personally and/or my family am
paid by the following companies mentioned in this interview:
None. I was not paid by Streetwise Reports for participating in
this story.